[I wrote this little piece on
November 23, 1993, in response to a member of Congress who said he wanted to
know in a hurry about supply-side economics. I had remembered that President
Dwight D. Eisenhower said he would not read any memos that were longer than
one page, so I squeezed it down to that.]

THE WAY THE WORLD WORKS: SIMPLIFIEDby Jude Wanniski -
November 23, 1993

As the U.S. and most of the world economy continues to
stumble along, the economics professionals and their agents in the financial
press are becoming increasingly complex and prolix in their rationales and
prescriptions. In trying to explain my own thinking to the political class,
I've tried to go in the other direction, simplifying in the extreme. In this
simplest of all world economic models, there are only three people: A rich old
man; a poor but aspiring young man; and the government. Here's what it is all
about:

The rich old man has capital, but does not wish to work. The
poor young man has labor, but no job and no capital. The rich man would invest
in the poor man, but the government tax rate on investment income is so high
that after considering the risks, the rich man is discouraged. The government
comes upon this predicament and decides the poor man has to be sustained, with
food, housing and health care, and borrows these from the rich man, giving him
a bond and making the transfer. The government deficit increases. The rich man
holds debt instead of equity. The young man might go to work, but when he sees
that his investment in himself will be taxed at the same discouraging rate if
not more, he remains idle, continuing to receive his subsidy. The unemployment
rate remains high, and the government is soon faced with the problem of paying
interest on the bond held by the rich man. It must either tax the rich man to
pay him his interest, which discourages the rich man from buying more bonds
from the government, or it borrows the interest from him with a new bond,
which increases the deficit, et cetera. The government can also reduce its
obligation to the rich man by devaluing the currency, which means it cheats
the rich man out of principal. That also discourages the rich man from further
investments in government bonds.

Is this too simple to explain what's
happening all over the world? Do you need a more complicated explanation of
why government deficits are increasing, interest rates are rising,
unemployment rates are climbing? Isn't it enough for you to see that if the
government lowers the tax on equity income, the rich old man will invest in
the poor young man, buying equity instead of debt. This would tend to drive up
the stock market in this three-person economy, and drive down the bond market,
since the rich man isn't buying debt. (This is why we're told the bond market
doesn't like a strong economy.) But wait, the young, aspiring man now has
capital, covering his food, housing and health care. This means the government
doesn't have to issue the bond to cover a deficit, and in fact is able to tax
the young man, who has chosen to invest in himself by working instead of
remaining idle, because the government tax is no longer discouraging. This
means the government revenues rise as the deficit falls, and unemployment
declines, and stock markets and bond markets rise. The crime rate falls as
idle young men are now occupied, getting rich.

Why don't our Nobel
Prize winning economists see this? Because the concept of risk-taking does not
exist in a demand model, and all our Nobel Prize winners live in a risk-free
world, where debt and equity are interchangeable. If this simple world
economic model were in place, think of how many economists, lawyers and
accountants would be out of business, forced to work for a living. That's why
it's all too simple.